One of the more complex aspects of investing and buying stocks is determining how expensive or inexpensive a stock is relative to its intrinsic value. While at first glance one could assume it’s as simple as a stock’s price per share, there are actually several factors to consider when making smart choices regarding which stocks to buy. While it is fair to say that some stocks are simply more affordable than others, other factors also determine success such as the stock’s underlying company.
Penny stocks are stocks under 5 per share, technically, but, many are in fact stocks under 1.
Penny stocks are known to seduce hopeful investors thanks to the low capital investment required and their potential for notable gains.
However, as with any great reward, there’s an increased risk. Just as you can win big time by buying penny stocks, you can also lose a lot if you’re not careful. These companies are often speculative and highly volatile. Timing is of the utmost importance in knowing when to unload or buy up stocks under 5.
For the risk-tolerant investor who is willing to do significant research, penny stocks can be found that offer an attractive risk-reward profile. But, how does one recognize these seemingly mythical stocks under 5?
Strategies for Buying Stocks Under 5
Due to the aforementioned risks inherent to most stocks under 5, institutional investors, such as pension funds, generally avoid penny stocks. They may even be required to sell securities that fall below the $5 mark as part of their risk avoidance strategy. However, the moment a stock’s value rises above $5 per share, these same institutions may become buyers with sell-side analysts more inclined to initiate research coverage. Therein lies the $5 threshold trading strategy (for more info check out: The $5 Threshold Trading Strategy Explained).
This narrowed down a list of stocks under 5 may potentially prove to be smart investments as part of the $5 threshold trading strategy.
#1: Helios and Matheson Analytics Inc. (HMNY 9.66%): This data analytics company has seen its stock price languish since the announcement of another dilutive offering in a long list; hence how this has become a stock under 5.
However, the CEOs of both Helios and subsidiary MoviePass have actively engaged the media and publicized in such a way that may indicate future success looming on the horizon. The self-promotion strategy makes sense to take advantage of already landing in the headlines and turning the story around. The company even said in a recent interview it is examining partnerships with everyone from ride-sharing apps to Amazon.com, Inc. AMZN 0.67%. The potential announcement of an official partnership would send the stock price back up quickly, giving investors a chance to lock in short-term gains. Such an announcement also offers the possibility it could bring MoviePass public. However, this is one of the market’s more volatile and polarizing stocks, so buyer beware.
#2: Pandora Media, Inc. (P 1.34%): The streaming music platform saw its market cap plummet when investors seeking stocks to buy expected a speculated acquisition by Sirius XM Holdings Inc SIRI 1.25% and were instead shocked by the announcement of a “strategic investment” in November of 2017.
More recently, the company issued underwhelming guidance when it reported fourth-quarter stats just last month. However, it appears management’s renewed focus on profitability is a hopeful sign. Wedbush’s Michael Pachter explained that the market is heavily discounting the size of Pandora’s user base which could be leveraged for a profit. As Pachter mentioned, one way of leveraging this large user base is through an acquisition. BMO Capital Markets’ Dan Salmon even went so far as to indicate Sirius XM could be that acquirer. Last summer, it was rumored Sirius had offered $8 per share, a move that would make those who invested in its penny stocks quite happy.
#3: RLJ Entertainment, Inc. RLJE 2.96%: Penny stocks from the digital media company led by BET Networks, founded by Bob Johnson, could also soar through an acquisition.
It received an offer from AMC Networks Inc. AMCX 0.77% on 26 February to acquire majority control of the company. AMC Networks had already acquired an almost 26-percent stake in 2017 with an option to purchase majority ownership. A Benzinga interview from 2016 following a streaming partnership between AMC and RLJ indicated that the deal could “result in something bigger than we ever planned.”
Furthermore, RLJ recently reported subscriber growth of 55 percent year-over-year. It also boasts a recent stake taken by GAMCO Investors, according to a 28 February 13D filing. The company has convened a special committee to review the AMC offer of only $4.25 per share. Because the stock has traded above that level since 27 February, it appears the market could anticipate AMC, or a competitor, to offer a larger bid.
#4: VBI Vaccines Inc. (VBIV 2.82%): VBI penny stocks company both closed 2017 and opened 2018 with news of dosing beginning in its Sci-B-Vac and VBI-1901 vaccines, respectively.
This stock is preferred by institutional investors, including prestigious biotech hedge fund Perceptive Advisors, which reported an increased stake in the company in its most recent 13F filing. Noting “multiple clinical data readouts” anticipated throughout 2018, BMO analyst Do Kim late in 2017 set an $11 price target. He believes VBI’s earlier stage clinical pipeline could drive significant share upside in 2018.
#5: Zynga Inc. (ZNGA 1.04%): Shares of this “social gaming” company have been classified as stocks under 5 for over a year, taking a notable tumble after the company’s disappointing Q1 guidance reported on 7 February.
Still, this example of penny stocks has fans like Omega Advisors’ Leon Cooperman who first took a stake in the stock in early 2017. He has added to his position on a couple of occasions, including during the most recent quarter, as evidenced by his latest 13F filing.
Wedbush’s Pachter raised the price target from $4.85 to $5.50 following Zynga’s Q4 conference call, describing it as “a compelling investment” while noting the company exceeded its bookings guidance for 12 consecutive quarters.
With the launch of at least one new game promised for the second half of the year, Pachter estimates bookings to meet or exceed $935 million this year, making this a compelling option for stocks to buy in 2018.